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Creating a trading plan

Creating your own trading plan is one of the most important things you will do before starting to trade. The second one would be following your plan at all times.

First thing to do is to learn to know yourself, as this makes it easier to create a trading plan that actually would fit YOU. You need to understand your own emotions, why you do things and what affects you. You need to understand your own psyche. You need to know about yourself to keep the emotions (fear & greed) as far from your trading decisions as possible. You need to be totally calm when trading. Yes, I know this may sound like weird suggestion, but that’s what successful professional traders do.

What are your motivations for becoming a trader at all? Are you a trader material anyhow? Maybe youd be better of running your own business or anything else similar. Remember that 90% of traders fail. Do you take it as a challenge to get to the other 10%? What are your main goals as a trader? What makes you think you can actually reach your goals?

What will you want to become, short-term, intermediate-term or long-term trader? Are you into fundamental or technical analysis? Do you know about the chosen analysis method at all? How much time are you willing to commit to trading? Day traders really need to be working with their computers, staring at their screens, analysing stocks every day for hours and hours. In case of stocks, in order to become a day trader you need to be aware of pattern day trading and what it is, this is not the case in case of foreign exchange though. Is your trading style buy&hold or is it agressive where you take advantage of even the smallest movements in the market?

What are your strengths and weaknesses? Are you aware of them? How can you know that? The answer is just to look at what you have done before and how you have done it, in life, in business. Is discipline your strong point? Or is it your weakness? Are you an adrenalin junky? If so, this might be your weak point as you have a tendency of getting emotional. Paper trading can sometimes also answer many of these questions to you after you have analysed your trades.

Are you in a good shape? Both physically and mentally? The better mental state you are the better trades you can make. If you are often in a bad mood, this never helps. When you’re tired and lonely, this is no time to trade, this is time to take a day off even though you might want to find something to do and decide to make trades – DON’T! If you’re distracted by anything, you are unable to make good trades more often than not. You can go to your 9-5 job with a katzenjammerbut you can’t trade in this state.

What are your income goals? Are you able to break them down into daily income goals? Are your goals per day and per month reasonable in the meaning that if you want to make 2% a day and 80% per month…this doesn’t really add up, does it? These percentages need to be based on your paper trading results not taken from the thin air.

What are your main goals? Yes, we all want to make money, but do you also want to become a good trader? Is that your main goal? If you want to get rich, this doesn’t help you much. But if you want to become a good trader, then the financial freedom will come with it. How are you going to become a good trader, what will you do in order to achieve that?

What additional skills do you want to master within the next week/month/year? And how will you master them, what’s your master plan, do you have it at all?

When reaching your daily, weekly, monthly financial goals, how will you reward yourself?

Which markets are you going to trade and at what time of the day? Are there any special instruments you’ll be focusing, eg certain currency pairs or stocks in certain industries? What should the minimum daily volume of those stocks be, the minimum average daily range? Which charts will you be using as a bases of your analysis?

Which trading platform and broker are you going to use? This is a really important decision for you, depening on your expected account size, type of trading, etc. For forex spreads are important, for stocks the commissions are important, plus platform and broker reliability, speed of trade executions, easiness of platform, platform funcionality etc. What other services are you going to use to improve your trading?

What will your daily „morning” routine look like? What homework will you need to do every day before starting trading? How? Where?

Do you keep a journal of your trades? This is rather important in order for you to analyse both your winning and losing trades. It’s often a good idea to do that every morning with your previous day’s trades. To see what have you done wrong and to make sure you wouldn’t do it today.

Do you keep your trades overnight? If you haven’t stated that you do in your trading plan, you shouldn’t, ever.

What are the market conditions, have there been any news in your traded market or anything related? Where will you get this data every day?

Every day you should be writing a journal about the market condition, hourly if possible. What are your expectations, how did it actually turn out?

Which strategies are you going to use to make your trades? How will you set your entry and exit points? What is the risk/reward ratio for each strategy?

How will you minimize your losses and maximize your profits? This is the question of money and risk management. What will be the % of your account value you are ready to risk with every trade? It is suggested that all your open positions together shouldn’t be able to bring you more loss than 5% of your account value. What is your maximum exposure to one market or stock group or currency pair? Note that if you trade on foreign exchange, then EUR/USD & GPB/USD might both suffer if USD gets stronger.

In addition to making you have a risk/reward ratio in place you should also consider the probability of the trade going your way producing the profits expected. For example if your risk/reward ratio is 3:1 but the probability of the trade going your way is 25% then it doesn’t sound like an idea for a good trade anymore. And of course, what risk/reward ratio are you after anyhow? Is it 2:1, 3:1, 4:1? Considering your strategies, is it reasonable or even possible in reality?

Have you ever thought about stop loss limits? Well, I hope so, if you haven’t, you should.

When will you call it a day? This can be either after a certain amount (or %) in loses or after you have reached your daily profit goal.

What will you do when your account size increases? Will you increase the amount put into any trade, increase the % put into any trade or...?

If you have your stop loss set and the trade is going in the wrong direction, do you allow yourself to end the deal before the automatic stop loss is generated?

What will you do in the end of every trading day? It is advisable to analyse your trades and then do that again the next morning.

Now, ae you able to stick to your own plan and set of rules? What will you do if you break the rules? What will you do if you break the rules more than once? It can’t stay like that. There’s two ways to go, you need to look into yourself and see what were the reasons for breaking the rule. Was it that the rule really was a bad one and should be changed? Or was it you who just made bad trades independent of good rules? Ne way or another, you’ll need to change something.

What are your main trading rules? Everything talked about in this post is important, but you should set some rules for yourself that can NEVER EVER be broken.